Decarbonising Aviation: In conversation with IBA

Jennifer Stanley ESG Manager, IBA

Phil Seymour President, IBA

Aviation is known for being a challenging sector in terms of sustainability. For companies looking to integrate sustainability into their financial strategies, where should they begin?

In this Q&A interview, Phil Seymour and Jennifer Stanley, of the world-leading aviation intelligence and advisory company IBA, discuss the challenges the aviation industry faces on its road to decarbonisation and how to tackle complex issues like Scope 3 emissions.

1. Aviation is known for being a challenging sector in terms of sustainability. For companies looking to integrate sustainability into their financial strategies, where should they begin?

Understanding their data!

In order to navigate a path to net zero, companies need to be able to benchmark their data and draw a line in the sand as to where they currently stand. Within the aviation industry, emissions is a key focus area. Understanding current emissions is essential for determining the scope and scalability of a company’s sustainability strategy with a view to reaching net zero by 2050.

We’ve helped many companies understand their data, enabling them to plot this onto a decarbonisation curve and align it within their overall sustainability objectives. This helps support them through the first stages of their ESG reporting journey, and it is a journey.

When looking at the regulatory obligations, specifically within Europe, they are time consuming, large and complex data reporting mandates. In some cases, this can be quite overwhelming but by understanding what the data is showing, even at a basic level, companies can start to tackle all of their reporting requirements!

2. Scope 3 emissions are hard to measure but vital for understanding a company’s environmental impact. Why are they essential, and how can they be integrated?

Starting with Scope 3 emissions - these are indirect Greenhouse Gas emissions that are produced through the company's upstream and downstream supply chain. Scope 3 emissions are essentially focussed on supply chain decarbonisation but are also required in regulatory frameworks such as the Corporate Sustainability Reporting Directive (CSRD).

For financiers, part of the Scope 3 emissions are the emissions of the aircraft that they are financing.

Many companies focus on their direct emissions (Scopes 1 and 2) as these are more within their control. However, Scope 3 emissions are crucial, as they are typically the largest of the three scopes and consider the entire value chain of the company. In this context, sustainable internal practices alone are not enough; companies must ensure that all parties in their supply chain are committed to sustainability.

3. Greenwashing remains a concern across industries. How big is the challenge in aviation, and how can it be addressed?

Market participants across all industries need to be cognisant of greenwashing risk, and greenwashing risk is therefore at least as important in the aviation sector as for other sectors. Given the high-emissions nature of aviation as a sector however, it is likely that environmental claims/statements in this sector will be subject to a higher level of scrutiny compared to low to no emissions sectors. As such, great care must be taken by market participants.

Market participants may look to map all relevant rules and regulations which might be applicable and to take steps to ensure compliance with these rules and regulations (such as, for example, ensuring that environmental claims are “clear, fair and not misleading”). As an industry we are calling for standardised guidelines and reporting metrics to make this easier for all market participants.

4. In your view, is sustainability being accurately reflected in financial deals and pricing? Are we seeing enough integration of environmental factors into deal structures?

According to Reuters, 2024 saw c.20% of all financial deals incorporating sustainability features within them and this is likely to have been an increase compared to 2023. The aviation market increasingly favours sustainability-linked and green-labelled financing instruments, driven by a focus on enhanced due diligence and the financing of newer, more efficient aircraft. In practice, this means that companies with access to newer aircraft are able to secure better investment terms compared to those investing in older models.

Whilst sustainability-linked loans are becoming more common place, in order to move the needle and achieve meaningful decarbonisation across the industry as a whole, we need significantly more investment in both new and innovative technologies, as well as Sustainable Aviation Fuel. With only 20% of deals currently incorporating a sustainability element, we are still far from where we need to be.

Beyond emissions, financial deals should also consider what companies are doing up and down their supply chains and incorporating this into deals. Whilst social and governance considerations are often as important as environmental factors, they currently receive less attention within the aviation industry. But I do believe that this will change in the next decade or so.

Data availability is key to unlocking pricing sustainability in financial deals - you need to know and understand the data and associated credit risk, prior to being able to price deals appropriately. With the data available at the moment, I believe that sustainability is adequately priced into financial deals.

Ideally, we need to see increased liquidity for companies that are integrating sustainability into their business strategies. However, for the industry to achieve this, companies must be compared on a like-for-like basis. This requires transparent, consistent data points, which can then serve as benchmarks for setting KPIs and SPTs under sustainability-linked loans. At IBA we have built a system that allows users to compare like-for-like metrics, such as RTK/RPK/ASK/ESK1, as well as total intensity and total emissions. We have found that this really supports our users to have a transparent picture of airline operators within their portfolio. As an industry we require one metric to measure emissions that is globally recognised.

1. RTK (Revenue Tonne-Kilometer) – The total weight of passengers, cargo, and baggage that an airline transports, multiplied by the distance flown.

RPK (Revenue Passenger-Kilometer) – The total number of paying passengers carried, multiplied by the distance flown.

ASK (Available Seat-Kilometer) – The total number of seats available on a flight, multiplied by the distance flown (measuring airline capacity).

ESK (Equivalent Seat-Kilometer) – Similar to ASK, but based on the standard seat layout recommended by the aircraft manufacturer rather than the individual airline configuration.

5. Looking ahead to 2025, what are the key trends or risks in the market that companies should be particularly vigilant about when it comes to sustainability and finance?

Sustainability is here to stay and is becoming an increasingly important focus in reporting. Within the European Union alone, corporates and financiers must align with multiple reporting frameworks, and even with potential simplifications under the EU Omnibus proposal, ESG reporting will remain central. Consumers are becoming more knowledgeable and will continue to demand more from their financial institutions, particularly in terms of sustainability-linked and green use of proceeds instruments.

While political pressures to relax sustainability-focused regulations in the short term to stimulate growth could be mistaken for ESG fatigue, this fails to account for the economic competitiveness driven by consumer demand, especially from Gen Z, who prioritize sustainability. Political shifts, particularly in the US, may influence regulations, but the growing demand for sustainable practices will continue to drive the agenda. As sustainability becomes a key focus for the next generation, businesses will face increasing pressure to remain competitive by aligning with these values.

Focusing specifically on the aviation sector, it was encouraging to see the announcement of standards for a centralized carbon market mechanism at COP29. This development should be highly beneficial, levelling the playing field for carbon offsetting and supporting hard-to-abate sectors, including aviation, in achieving net-zero emissions by 2050. We also anticipate increased market diversification as these markets mature and as new labels, e.g. the EU flight emissions label, come into being. These developments have the potential to make financing deals easier as sustainable data points become more transparent/available.

Finally, companies must stay aware of technological advancements in aviation. While it seems unlikely that a hydrogen aircraft suitable for commercial use will be delivered this year or even within the next decade, rapid technological developments are occurring. It is crucial for companies to stay ahead of the curve in order to maintain their competitiveness.